To no one's surprise, politicians are rushing in with various plans for helping the economy. Most of these plans involve "stimulus." The calls are loud to put more money into the hands of ordinary Americans in hopes that they will spend – not save – it, thereby boosting the overall economy.
Such stimulus, however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.
If it comes from taxes, the value of Jones's stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.
The only other means of paying for such stimulus is for the Federal Reserve to create new money. Unfortunately, this option leads inevitably to inflation.
All Americans wind up with more dollars in their wallets but also paying higher prices in the stores. Prosperity is not created by raining down upon the populace more monochrome pictures of dead statesmen.
